Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 8 Receivables 367

When the note matures, the company records the receipt of $6,060 ($6,000 princi-

pal plus $60 interest) as follows:

Dec. 21 Cash 6,060

Notes Receivable—W. A. Bunn Co. 6,000

Interest Revenue 60

Dec. 21 Accounts Receivable—W. A. Bunn Co. 6,060

Notes Receivable—W. A. Bunn Co. 6,000

Interest Revenue 60

2008

Dec. 1 Notes Receivable—Crawford Company 4,000

Accounts Receivable—Crawford Company 4,000

31 Interest Receivable 40

Interest Revenue 40

2009

Mar. 1 Cash 4,120

Notes Receivable—Crawford Company 4,000

Interest Receivable 40

Interest Revenue 80

If the maker of a note fails to pay the debt on the due date, the note is a dishon-

ored note receivable. A company that holds a dishonored note transfers the face value

of the note plus any interest due back to an accounts receivable account. For example,

assume that the $6,000, 30-day, 12% note received from W. A. Bunn Co. and recorded

on November 21 is dishonored at maturity. The company holding the note transfers

the note and interest back to the customer’s account as follows:

The company has earned the interest of $60, even though the note is dishonored.

If the account receivable is uncollectible, the company will write off $6,060 against the

Allowance for Doubtful Accounts.

If a note matures in a later fiscal period, the company holding the note records an

adjustment for the interest accrued in the period in which the note is received. For ex-

ample, assume that Crawford Company uses a 90-day, 12% note dated December 1,

2008, to settle its account, which has a balance of $4,000. Assuming that the accounting

period ends on December 31, the holder of the note records the transactions as follows:

The interest revenue account is closed at the end of each accounting period. The

amount of interest revenue is normally reported in the Other Income section of the

income statement.

REPORTING RECEIVABLES ON THE

BALANCE SHEET

All receivables expected to be realized in cash within a year are presented in the

Current Assets section of the balance sheet. These assets are normally listed in the or-

der of their liquidity, that is, the order in which they are expected to be converted to

Describe the reporting of
receivables on the balance
sheet.

7

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